Matakuliah: D0762 – Ekonomi Teknik Tahun: 2009 Replacement Analysis Course Outline 10

Replacement Analysis 2 When should a new truck replace the existing truck? When should a process be redesigned? When should a product be redesigned? The most common question asked in industry is: when should the existing be replaced? Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

Replacement Analysis Terms Defender: the existing equipment, building, or decision previously implemented Challenger: the proposed replacement currently under consideration 3 Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

4 Aspects of Replacement Analysis 1.Using available data to determine the analysis technique 2.Determining the base comparison between alternatives 3.Using analysis techniques when: 1.Defender marginal cost can be computed and is increasing 2.Defender marginal cost can be computed and is not increasing 3.Defender marginal cost is not available 4.Considering possible future challengers 5.After-tax analysis

5 Shall the defender be replaced now or be maintained for one or more periods? The Replacement Problem Engineers replace the existing due to: –Obsolescence: technological change –Depletion: loss of market value –Deterioration: wear that is overly expensive to repair Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

6 Issues (Consider Before Starting) –If a unit fails, must it be removed permanently from service, or repaired? –Are standby units available if the system fails? –Do components or units fail independently of the failure of other components? –Is there a budget constraint? –If the unit can be repaired after failure, is there a constraint on the capacity of the repair facility? Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

7 Issues (Continued) –Is only one replacement allowed over the planning horizon? Are subsequent replacements allowed at any time during the study period? –Is there more than one replacement unit (price and quality combination) available at a given point in time? –Do future replacement units differ over time? Are technological improvements considered? –Is preventative maintenance included in the model? Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

8 Issues (Continued) –Are periodic operating and maintenance costs constant or variable over time? –Is the planning horizon finite or infinite? –Are consequences other than economic effects considered? (i.e., sociotechnical issues) –Are income tax consequences considered? –Is “inflation” considered? –Does replacement occur simultaneously with retirement, or are there non-zero lead times? –Are cash flow estimates deterministic or stochastic? Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

9 Replacement Analysis Decision Chart WhereCompare Defender Marginal Cost DefenderBest Challenger 1AvailableIncreasingNext-year Marginal Cost EUAC at Minimum Cost Life 2AvailableNot increasingEUAC at Minimum Cost Life 3Not availableEUAC over Remaining Useful Life EUAC at Minimum Cost Life AnalysisTechniques Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

10 Decision Criteria leads to one of the following: If the defender is more economical, it should be retained. If the challenger is more economical, it should be installed. What Is the Basic Comparison? Identify the defender and the best challenger –Product –Machine –Process –Personnel –Mix Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

11 Minimum Cost Life of the Challenger Example 12-1 EUAC is the number of years at which asset cost in minimized. EUAC Equivalent Uniform Annual Cost Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

12 Marginal Costs Marginal Costs are the year-by- year costs for keeping an asset. This example illustrates the calculation of the marginal costs for a new item. Example 12-2 Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

13 Marginal Cost Data Defender Is the marginal cost of defender increasing? Here the marginal costs are increasing. Example 12-3 Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

14 Defender marginal costs are increasing Example 12-4 Replacement Analysis Technique #1 Replace when the marginal cost of ownership of the defender is more than the EUAC of the challenger. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

15 These assumptions appear to be rather restrictive. Analysis Technique # 1 Appropriate when replacement repeatability assumptions hold The best challenger will be available in all subsequent years at the same economic cost The period of needed service is infinite Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

16 Relaxing the Restrictions This spreadsheet considers that: –The best challenger is available in subsequent years at the same economic cost –The project life is known and limited Based on Example 12-4 Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

17 Minimum Cost Life of the Defender Depends on when in the life of the defender the analysis is computed. Example 12-7 Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

18 Replacement Analysis Technique #2 –If the replacement repeatability assumption holds, compare EUAC of the defender asset at its minimum cost life against the EUAC of the challenger at its minimum cost life. Example 12-8 The repeatability assumptions do not hold. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.

19 Here defining defender and challenger first costs can be an issue. Trade-in value is not a suitable value. Appropriate value is the market value. Replacement Analysis Technique #3 Compare the EUAC of the defender over its stated life against the minimum EUAC of the challenger. Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford University Press, Inc.